Here's what the Fed needs to do: STOP IT

When I first heard the Federal Reservewanted to encourage the SEC to mandate "exit fees" for investors in bond mutual and closed-end funds, I couldn't believe my ears.

The Fed is apparently concerned about a "run " on bond funds when investors clamor for the exits as soon as the Fed increases interest rates, and that a market "shock" might ensue. Yes, the Fed is concerned a market "bubble" has been created in high yield "junk" and corporate bond funds. Strangely enough, they themselves created it.

Recently, Fed Governor Jeremy Stein expressed concern that the bond market has become too large and too illiquid, exposing the market to a crisis and seizure if a deluge of selling ensued. A similar event occurred back in 2008 when the money-market funds briefly fell below par and "broke the buck." The Fed wants to slow any potential panic selling by constructing a barrier to exit. The rules governing the imposition of fees are prerogative of the SEC.

There are a few attributes of this policy consideration that absolutely confound me here:

1. The Fed itself created this bubble by instituting a zero interest-rate policy (ZIRP) for many years, thus forcing savers and retirees up the risk curve into lower rated debt, in order to make any income at all. Now it seeks to punish investors looking to exit such investments in the future by asking the SEC to add a layer of exit fees. Investors are already suffering from limited income on their assets — to pay another layer of fees is a travesty.

2. The concept of adding a layer of government-forced fees to a bond fund that an investor bought previously, without that investor initially being aware of any such fees, nor signing on to them, is the biggest trampling of contract rights I've seen since the government single-handedly crammed down General Motors unsecured debt holders in favor of the UAW. Were these fees in the fund prospectus, and if not, how can they be legally enforced?

3. Good old BlackRock, the top bond fund mutual fund manager, just coincidentally happens to agree these are a "good idea." No way, really? You mean the concept of the government penalizing investors from exiting the product which you make most of your living off of, and thus encouraging them to remain entrapped in, is a good idea? The fact that such an entity such as BlackRock would be called upon for an opinion is quite striking.

4. Prior to her Tuesday testimony before Congress, Janet Yellen herself had denied that any such bubble existed. In this latest testimony before the Senate Banking Committee, she, for the first time ever, acknowledged concern about the high yield bond markets, as well as social media and biotech valuations. But at the time Stein made his cautious comments, Chairwoman Yellen had as of yet failed to address any bubble concerns, both in her June testimony to Congress and a July 1st speech to the International Monetary Fund. What took so long? If the Fed has possessed such concerns for some time, why were they not mentioned in her previous testimony? The ongoing Fed attitude seems to have been " nothing to see here …move along!"

Is it possible there could be a deluge of selling of risky assets when the Fed exits its easy money ZIRP policy? Absolutely, despite even what Janet Yellen herself has previously said. But why stop at forcing just bond fund investors to pay exit fees ? Every single asset class that breathes and has a heartbeat has seen its valuation pumped up by the Fed's ZIRP policy — housing, commodities, stocks, taxi medallions ... Don't we need to impose punitive exit fees on every investment to convince average investors not to liquidate anything? But wait, there's no bubble here according to Janet, right? Nothing to see here ... move along.

Limiting investors access to their money or charging them fees to get it back is NOT the answer, especially when the aim is to continue to maintain the asset bubble created by the Fed itself. A zero interest-rate policy has forced savers to flock to risky assets like long dated corporate and junk bonds to earn anything at all.

Here's a novel solution: DISCONTINUE A FED POLICY THAT HAS DONE NOTHING TO KICKSTART ROBUST ECONOMIC GROWTH NOR SUBSTANTIALLY INCREASE EMPLOYMENT, AND INSTEAD, HAS INFLATED ASSETS HELD MAINLY BY THE WEALTHIEST 1 PERCENT, AND INCREASED THE WEALTH GAP BETWEEN RICH AND POOR TO RECORD LEVELS.

Commentary by James Sanford, a portfolio manager for Sag Harbor Advisors (www.sagharboradvisors.com). He has also worked with Credit Suisse Securities, JP Morgan Securities and Gleacher & Co.